DailyFinance.comhttp://www.dailyfinance.comDailyFinance.comhttp://o.aolcdn.com/os/df/2013/img/2-dailyfinance_logo_m.pngDailyFinance.comhttp://www.dailyfinance.comen-usCopyright 2015 Weblogs, Inc. The contents of this feed are available for non-commercial use only.Blogsmith http://www.blogsmith.com/The Right Filing Status Can Pay Off Big Time on Your Taxeshttp://www.dailyfinance.com/2015/03/31/filing-status-affects-your-taxes/http://www.dailyfinance.com/2015/03/31/filing-status-affects-your-taxes/http://www.dailyfinance.com/2015/03/31/filing-status-affects-your-taxes/#commentsFiled under: Taxes, Income Tax, Tax Deductions, Tax LawsAlamy
Tax season is in the home stretch, and millions of Americans are working hard to get their tax returns in by the April 15 deadline. Yet even as you focus on getting the numbers right and looking for strategies to make the most of available tax breaks, many people never really think about the importance of one essential component of their returns: which tax filing status they claim.

At first glance, your tax filing status might seem more like a piece of personal information than a key part of your tax planning. Yet filing status can make a huge impact on how much you owe. Let's take a closer look at your tax filing status and why it matters so much.

Tax Filing Status: What the Options Are

Taxpayers have five filing statuses that can apply to their personal situation. Two of the options cover most people who aren't married, while two more apply for most married couples, and the fifth deals with those whose spouse has recently died.

Those who aren't married as of the last day of the tax year typically file either as Single or as Head of Household. The Head of Household status is available to those who pay more than half the cost of keeping up a home for a qualifying child or other eligible relative. Typically, the child must be 18 or younger and live with you for more than half the year. Full-time students who are 24 or younger can also qualify. Other relatives must have limited income and either live with you more than half the year or be eligible for you to claim as an exemption on your tax return. If you don't qualify as a Head of Household, then you'll typically need to file as a Single taxpayer.

Married taxpayers can typically choose to file jointly or separately. Married Filing Jointly status involves adding up income and deductions and treating the couple as a single economic unit, while Married Filing Separately requires you to split up income and deductions according to state law and by what each spouse actually received and paid.

Widows and widowers have special rules. If your spouse died during the tax year, then you're allowed to file a return for that year under Married Filing Jointly status. Furthermore, if you have a dependent child and your spouse died within the two preceding tax years, then you can use the Qualifying Widow(er) With Dependent Child status.

The Big Difference Tax Filing Status Makes

The reason that tax filing status is so important is that nearly everything about your tax liability depends on it. The impact of qualifying for a different status can dramatically reduce your tax bill. For instance, having Head of Household status has many advantages over Single status. Using 2014 figures as examples:

Your standard deduction of $9,100 is $2,900 higher than Single filers.

Your tax brackets extend higher, letting more of your income get taxed at lower rates. For example, Single filers have to pay a 25 percent marginal rate starting at $36,900 in taxable income. Head of Household filers pay 15 percent all the way up to $49,400, allowing you to save as much as $1,250 in taxes compared to Single filers.

Wider tax brackets also give Head of Household filers more opportunity to take advantage of lower maximum tax rates on long-term capital gains and dividend income, with the 0 percent rate extending $12,500 higher and the 15 percent maximum applying until income reaches $432,200, $25,450 higher than for Single filers.

For widows and widowers, the differences can be even more extreme. Without Qualifying Widow(er) status, Single or Head of Household status would provide much lower standard deductions than the $12,400 that applies. Essentially, Qualifying Widow(er) status is equivalent to Married Filing Jointly for couples, featuring tax brackets that in some cases are twice as wide as those that Single filers have.

Finally, some tax breaks simply aren't available to those in certain tax filing statuses. Married Filing Separately taxpayers take the biggest hit here, as they don't qualify at all for the Earned Income Tax Credit, the Child and Dependent Care Credit, and several education provisions including the American Opportunity and Lifetime Learning credits. Higher income thresholds for joint filers can allow some people who file as Married Filing Jointly to take deductions or credits that they wouldn't qualify to receive if they filed as Married Filing Separately.

]]>dependentsEarned INcome Tax Creditfiling statushead of householdincome taxmarried filing jointlymarried filing separatelyqualifying widower with dependentssingletaxtax lawstaxesDan CaplingerTue, 31 Mar 2015 06:00:00 EST3 Surprising Things That Add to Your Tax Billhttp://www.dailyfinance.com/2015/03/30/3surprising-additions-tax-bill/http://www.dailyfinance.com/2015/03/30/3surprising-additions-tax-bill/http://www.dailyfinance.com/2015/03/30/3surprising-additions-tax-bill/#commentsFiled under: Taxes, Unemployment, Social Security, Income Tax, Tax LawsDiane Macdonald/Getty Images
Although it's easy to understand basic tax rules like how your salary is treated as taxable income, there are some surprising provisions in the Internal Revenue Code that force you to pay taxes on unexpected items. If you're not prepared, you can easily get hit with extra tax liability that you didn't plan on.

In particular, three tax rules can force you to pay extra taxes in situations where you might already be in a difficult position financially. Let's take a closer look at them to make sure you don't get blindsided at tax time.

1. Unemployment Benefits Are Taxable

When you lose your job involuntarily, unemployment insurance usually kicks in to replace at least some of your lost income. What many people don't realize, though, is that unemployment benefits are usually subject to income tax. In some situations, you're allowed to recover amounts you paid in nondeductible contributions to a government or private unemployment fund, but beyond that, benefits are almost always taxable.

What makes this particularly surprising is that welfare and public assistance benefits from government programs typically aren't subject to income tax. One rationale for the distinction is that welfare benefits are based upon need, while unemployment insurance benefits are meant to replace specific amounts of what would be taxable wages. Regardless, it's smart to consider having taxes withheld from your unemployment benefits to make sure you don't get hit hard with extra tax liability in April.

2. If You Had Debts Forgiven, You Might Owe Tax

Often, when people get into trouble with debt, they end up having to work at getting their lenders to forgive all or part of what they owe. If you're fortunate enough to have your bank forgive some of your debt, you won't see a dime -- but the IRS often treats the forgiven debt as taxable income and charges taxes on it.

There are many exceptions in which the tax law specifically says forgiven debt is not subject to tax, including debts discharged in bankruptcy or insolvency as well as forgiveness of qualifying debt on a farm, business real property, or a principal residence -- although this last provision expired as of the end of 2014. Certain student loan forgiveness is also exempt from tax. But in other cases, such as credit card debt forgiveness, you may well get a tax form showing your taxable income, and you run the risk of an audit if you don't include it on your tax return.

3. Social Security Benefits Are Sometimes Subject to Income Tax

Most people see their Social Security benefits as money they earned through paying payroll taxes throughout their careers. Yet for some taxpayers, a portion of benefits they receive from Social Security are included in their taxable income.

For single filers making more than $25,000 and joint filers with incomes of $32,000 or more, as much as half of your benefits can be subject to tax. Above the $34,000 mark for singles and $44,000 for joint filers, the taxable portion of your benefits goes up to as much as 85 percent. Some proposed legislation has suggested raising those limits in future years, but for now, they're hardwired into the tax laws -- and they don't adjust for inflation, suggesting that a rising number of U.S. senior citizens are likely to run into the provisions over time.

]]>debt forgivenessincomeincome taxirsjobless benefitssocial securitySocial Security benefitstaxtax lawsunemployment benefitsDan CaplingerMon, 30 Mar 2015 06:00:00 ESTThis Popular Last-Minute Tax Move Might Be Wrong for Youhttp://www.dailyfinance.com/2015/03/26/last-minute-tax-move-possibly-bad/http://www.dailyfinance.com/2015/03/26/last-minute-tax-move-possibly-bad/http://www.dailyfinance.com/2015/03/26/last-minute-tax-move-possibly-bad/#commentsFiled under: Personal Finance, Retirement Plans, IRA, Roth IRA, Tax CreditsShutterstock
As the April tax filing deadline approaches, many taxpayers look for last-minute tax deductions they can use to reduce the amount they owe the Internal Revenue Service. One of the best ways you can reduce your taxes is to make a contribution to a traditional individual retirement account, which you can do up until April 15 and still treat as a contribution for the 2014 tax year.

In some cases, though, grabbing that last-minute tax deduction with a traditional IRA isn't your best move. Instead, you might be able to get a much larger benefit down the road by using a different type of retirement account: the Roth IRA.

The Difference Between Roth IRAs and Traditional IRAs

Roth and traditional IRAs are both retirement accounts, but the way they get treated at tax time is much different. Only traditional IRAs can give you an up-front deduction to reduce your tax liability when you contribute. Roth IRA contributions are never deductible on your taxes.

Roth IRAs have an offsetting advantage down the road. In retirement, you have to pay taxes on your traditional IRA withdrawals. Roth IRA withdrawals are typically tax-free, potentially saving you a bigger tax bill in retirement.

When Waiting Can Make You Richer

In deciding whether to use a traditional IRA or a Roth IRA, the main question is whether what you give up in a current tax deduction is worth the future benefit of tax-free retirement income down the road. It's impossible to predict with absolute certainty what the future will bring, but there are some general situations in which you can be reasonably certain that one choice will be better than the other.

If you have relatively little income now, then the odds are good that you're in a low tax bracket, and therefore, the deduction you'd get from a traditional IRA contribution won't be worth very much. For instance, if you contribute $1,000 to a traditional IRA and you're in the 10 percent tax bracket, then your deduction will only save you $100 on your tax bill.

Meanwhile, by the time you reach retirement, you might well have enough income to be in a much higher tax bracket. In the above example, if you've climbed up to the 25 percent tax bracket in retirement, then when you withdraw that $1,000, you'll owe $250 in extra taxes. In addition, you'll also owe that higher rate on all the income that your original $1,000 investment generated over the course of your career.

In that situation, you probably would've been better off using a Roth IRA. You wouldn't have gotten that $100 in tax savings now. But you would save the $250 in future taxes, and all the earnings from your investment would also be free of tax.

When You Should Grab the Deduction and Run

On the other hand, many people who have higher incomes now anticipate that they could be in a lower tax bracket by the time they retire. After all, retirement means you won't be getting any money from work anymore, and that should lower your overall income and send you into a lower tax bracket.

To change the above example slightly, say that instead of being in the 10 percent bracket, your income is high enough that you'd pay taxes at a 35 percent rate right now. As a result, a $1,000 traditional IRA contribution would produce tax savings of $350 rather than $100.

In that case, whether a Roth is better than a traditional IRA is more complicated. The $350 you save now with a traditional IRA is worth more than the $250 in future taxes on your initial investment, but you don't know how much in future earnings you'll have. A lot depends on what you plan to do with your current $350 savings. If you reinvest it, then you'll usually be better off having done the traditional IRA. But if you just spend it, then you can end up better off with the Roth even with a lower rate in retirement, depending on how long you have until you retire and what returns you earn on your investments.

Grabbing a tax deduction can be attractive, and contributing to any type of IRA is always a smart move. But before you automatically go with a traditional IRA, be sure to check to see whether you might be better off with a Roth. In the long run, it might end up being a better choice.

]]>contributionincome taxindividual retirement accountiraRoth IRAtaxtax bracketstax breaksDan CaplingerThu, 26 Mar 2015 06:00:00 ESTGet a $1,000 Retirement Match From the IRShttp://www.dailyfinance.com/2015/03/23/1000dollar-retirement-match-irs/http://www.dailyfinance.com/2015/03/23/1000dollar-retirement-match-irs/http://www.dailyfinance.com/2015/03/23/1000dollar-retirement-match-irs/#commentsFiled under: Retirement, Retirement Plans, 401K, IRA, Tax CreditsVitaliy Pakhnyushchyy
Saving for retirement is important, but it's also a challenge for most people. When you're struggling to make ends meet right now, finding extra money to set aside for years or even decades seems like a luxury you can't afford. To get more people to think ahead financially, one little-known tax law actually puts money back in your pocket when you make a contribution to an IRA, 401(k) or other retirement plan. With the potential to get as much as $1,000 back from the government via the Retirement Savings Contributions Credit, more commonly referred to as the Saver's Credit, you can't afford not to get moving with your retirement savings.

Using the Saver's Credit

The Saver's Credit is designed to get those with relatively low incomes to save more for retirement by providing a matching incentive. Depending on the amount of income you earn, the credit is equal to 10 percent, 20 percent or 50 percent of the first $2,000 you contribute to a qualifying retirement account. The credit percentage depends on what your gross income is, with higher credits available for lower-income earners. For the 2014 tax year, single filers earning $18,000 or less and joint filers with earnings of $36,000 or less qualify for the maximum 50 percent credit amount. Singles with earnings of $19,500 to $30,000 and joint filers who have incomes of $39,000 to $60,000 get the lower 10 percent credit, while those in the middle qualify for a 20 percent credit rate.

The net impact of the Saver's Credit is that if you save $2,000, you can get a credit back for as much as $1,000. If you file jointly, then both spouses can take the credit if they each make retirement contributions, bringing the family maximum up to $2,000.

The best thing about the Saver's Credit is that it's available on top of any matching that your employer might give you. So if you contribute $2,000 to your 401(k) and your employer provides a one-for-one match to add to your account, the credit will still be yours to keep. You can also still participate for 2014, as you can turn back the clock on an IRA contribution through April 15 into the 2014 tax year and claim the credit on the return you're about to file.

Why the Saver's Credit Might Not Work for You

Obviously, if your income is above the income limits for eligibility, then you won't be able to take advantage of the Saver's Credit. You also have to be 18 or older and not be a full-time student.

There's also one potential trip-up that even those who are eligible might find troublesome. The amount of the Saver's Credit is limited to the amount of tax liability you owe, and so you can't use it to get a refund above and beyond whatever you might have had withheld from your paychecks for income taxes. That's because the Saver's Credit is what's known as a nonrefundable credit. That can be a problem for low-income taxpayers, who typically don't owe a lot of tax in the first place.

The good news, though, is that refundable credits such as the Earned Income Tax Credit don't count against what you can claim for the Saver's Credit. Even if your tax picture doesn't let you claim the entire $1,000, you can still get whatever partial amount you might qualify to receive.

The Saver's Credit is essentially free money in your pocket to save for retirement. If you qualify, it makes sense to do everything you can to take advantage of the credit and start contributing to a retirement account right away.

]]>401kEarned INcome Tax Creditiralow-incomeretirement accountRetirement Savings Contribution Creditsavers creditTax CreditDan CaplingerMon, 23 Mar 2015 06:00:00 ESTDon't Get April-Fooled by This Very Costly IRS Tax Traphttp://www.dailyfinance.com/2015/03/21/ira-401k-costly-tax-trap/http://www.dailyfinance.com/2015/03/21/ira-401k-costly-tax-trap/http://www.dailyfinance.com/2015/03/21/ira-401k-costly-tax-trap/#commentsFiled under: Taxes, Personal Finance, 401K, IRA, Income Tax, IRSGeri Lavrov/Getty Images
April is the month that Americans most associate with taxes, with millions of taxpayers waiting until the last possible moment before the April 15 filing deadline to get their returns in. Yet a select group of older Americans face a key deadline two full weeks before Tax Day, and if they fail to make a critical move with their retirement accounts by April 1, the Internal Revenue Service could step in with one of the harshest penalties you'll find in the tax laws.

Fortunately, it's not hard to avoid this IRS tax trap. Later on, we'll show you what you need to do to steer clear of this potential pitfall, but first, let's take a look at why the government puts such a high price tag on complying with this key retirement rule.

When You Have to Start Spending Down Your Retirement Savings

Most people start tapping their savings after they retire, as they look for ways to cover living expenses without the benefit of a regular paycheck. For those who took advantage of tax-favored retirement accounts like IRAs and 401(k) plans to help them save for retirement, the opportunity to take penalty-free withdrawals opens up at age 59&frac12;, allowing even early retirees to make ends meet.

Some people, though, prefer to leave their retirement accounts untouched, in part because withdrawals from traditional IRAs and 401(k)s are added to taxable income. To prevent people from choosing never to take money out of retirement accounts, though, the IRS enforces required minimum distribution rules that force you to take withdrawals after you reach age 70&frac12;. Specifically, if you're one of the roughly 2 million Americans who turned 70&frac12; at some point during 2014, you have until April 1 to take out a set minimum amount from your retirement accounts. If you don't, then the IRS will impose a penalty equal to 50 percent of whatever you should have withdrawn.

You'd think that the threat of a big IRS penalty would spur people into action. But according to Fidelity Investments, as of Dec. 26, 2014, almost three out of every five accountholders who turned 70&frac12; during the year hadn't yet taken the correct amount, and a quarter of accountholders hadn't yet taken any withdrawal at all.

How Much Do You Have to Withdraw?

Where things get complicated is in figuring out your required minimum distribution. The IRS uses life-expectancy tables to calculate the fraction of your retirement-account balances you need to withdraw each year, with the amount generally increasing the older you get.

Confusingly, while the tax laws hinge on age 70&frac12;, the life-expectancy tables work in whole years. If you turned 70&frac12; and hadn't reached your 71st birthday by the end of 2014, then your life expectancy is 27.4 years, and so you'll have to withdraw a percentage equal to 100 percent divided by 27.4, or 3.65 percent. If you turned 70&frac12; early in the year and were 71 by year-end, then the corresponding figures are 26.5 years and 3.77 percent.

Once you have the correct percentage, you then multiply it by the total amount you had in your retirement accounts coming into 2014. For these purposes, you'll take the balance as of the last day of 2013. So if your IRA and 401(k) balances added up to $100,000, you'd have to withdraw $3,650 or $3,770, depending on whether or not you'd reached your 71st birthday by the end of the year.

In subsequent years, you'll need to take your required minimum distributions even earlier. The April 1 deadline moves up to Dec. 31 every year except the first one in which you're required to take RMDs.

April Fool's jokes are supposed to be funny, but a 50 percent IRS penalty is nothing to laugh about. If you were born between July 1943 and June 1944, be sure you check to make sure you've made the right withdrawal from your retirement accounts.

]]>401k7071irairsrequired minimum distributionrmdDan CaplingerSat, 21 Mar 2015 06:00:00 ESTWill Americans Really Win From a Falling Euro?http://www.dailyfinance.com/2015/03/13/will-americans-win-falling-euro/http://www.dailyfinance.com/2015/03/13/will-americans-win-falling-euro/http://www.dailyfinance.com/2015/03/13/will-americans-win-falling-euro/#commentsFiled under: Currency, Exchange Rates, Global Economy, European Union, EconomyShutterstock
The U.S. has a stronger economy than just about any other country in the world right now, and as a result, the U.S. dollar has risen in value to levels not seen in years. With the European economy struggling to grow and threats from weaker eurozone economies like Greece that could endanger the entire monetary union, the euro recently fell to its lowest level in more than a decade against the dollar.

That's great news if you're planning to travel to Europe in the near future, as you'll be able to get more euros for however many dollars you budget for spending on your trip. But if you're not part of the foreign jet-setter crowd, will you see any real benefit from the strong dollar? Thanks to the global economy, U.S. consumers should start to see some bargains close to home when they shop for imported goods, but a lot depends on exactly what you're looking to buy.

Why a Strong Dollar Should Make Things Cheaper for Americans

Any economics student will tell you that when foreign exchange rates fluctuate, they have an impact on the prices of foreign goods. When the dollar falls, it should make imported goods more expensive for Americans, because it takes more dollars to equal the same amount of foreign currency. Conversely, a strong dollar should make foreign goods cheaper for U.S. shoppers, as it takes fewer dollars to translate into a fixed price in foreign currency.

You can see this effect the most when you're dealing with mass-produced commodity goods. For instance, the U.S. dollar has also climbed dramatically against the Japanese yen, and that has helped bring prices of consumer electronics and other mass-market items down. Similarly, clothing costs have fallen in U.S. dollar terms, and that could help bring prices down for clothes-shoppers in the near future.

Where Theory and Reality Diverge

The problem, though, is that economic theory doesn't always hold true for every type of good from every market. If manufacturers of foreign products have pricing power, they can hold the line or even increase their prices in the U.S. despite the dollar's strength, taking the opportunity to get a big profit boost.

We've already seen that phenomenon happen with many luxury goods. For instance, many foreign winemakers have simply boosted their markup in the U.S. market, taking all the foreign-currency gains for themselves rather than passing them through to U.S. consumers. Similarly, high-end foreign automakers like Porsche have boosted their suggested retail prices on certain vehicles even in the aftermath of a falling euro, looking to maximize their profit margins and trade on their reputation rather than seeking to boost demand by lowering prices.

Moreover, many products that people associate with Europe, Japan and other foreign countries aren't necessarily manufactured there. Several foreign automakers, including Volkswagen (VLKAY), Honda (HMC), and Nissan (NSANY), have manufacturing plants here in the U.S., and because they pay U.S. workers in U.S. dollars, they don't necessarily reap cost savings from a strong dollar.

Could Dollar Strength Actually Hurt Investors?

Meanwhile, the same economic factors that help foreign companies in the U.S. hurt U.S. companies in foreign markets. To maintain their profit levels in U.S. dollars, multinational corporations have to raise their prices in foreign-currency terms. Those price increases make U.S. products less attractive to foreign buyers, hurting revenue at U.S. manufacturing companies and often sending their share prices downward. So far, the strength in the U.S. economy has largely offset weakness abroad, but many major companies have seen their profits take a big hit from the strong dollar.

Similarly, businesses that rely on the tourist trade in the U.S. could take a hit. Foreign travelers coming to the U.S. get fewer dollars when they exchange their foreign currency, and that in turn could rein in their spending plans. Those businesses could also suffer from a greater number of U.S. tourists deciding to travel abroad if they can afford to do so rather than staying close to home.

In the end, currency markets tend to fluctuate back and forth over the years, making long-term cycles that cancel each other out in the long run. Still, as markets adjust to rapidly changing conditions in foreign exchange, consumers should be on the lookout to see if the imported goods they like will finally go on a long-awaited sale.

The rise in electronic filing of tax returns has opened up the door to many new ways to run tax scams. One recent attempt involves fake emails purporting to be from the IRS and including links to a website that's intended to mirror the official IRS site, with the idea that you need to provide new information in order to update your e-filing account.

The danger here is that if you enter personal information on the fake site, scammers will have it and then potentially be able to steal your identity. The key here is to know that the IRS never sends emails to taxpayers requesting personal or financial information, so if you get something that looks like one, you can be assured that it's fake.

2. Phone Fraud From IRS Impersonators

Email isn't the only way criminals try to attack your identity. The IRS recently described a phone scam involving people claiming to be IRS employees, even adjusting their caller-ID information to make it appear that they're legitimate federal workers. They then say that you owe the IRS money and that you have to repay it using a prepaid debit card or wire transfer.

Again, beating this scam involves knowing what the IRS will and will not do. The IRS doesn't use telephone calls unless you've first received a bill for unpaid taxes, and it will never force you to use specific payment methods -- especially those that happen to be untraceable. Moreover, threatening tactics like bringing in law enforcement aren't part of the IRS' arsenal of debt-collection capabilities.

3. Helping You Until It Hurts

The IRS Taxpayer Advocate is a legitimate part of the tax agency that helps taxpayers understand and resolve outstanding tax issues. But a scam from last year took advantage of the Taxpayer Advocate's good name, as criminals sent fake emails offering help from the Taxpayer Advocate's office. Unsuspecting taxpayers then go to fake websites and enter personal information, opening the door to identity theft.

Like the rest of the IRS, the Taxpayer Advocate doesn't initiate conversations with taxpayers by email. If you haven't sought out the Taxpayer Advocate's help, then it won't offer that help unilaterally -- and you shouldn't fall for any scam that suggests otherwise.

4. Refunds That Are Too Good to Be True

Some scam artists pose as tax preparers, offering large tax refunds even to those who had no idea that they might qualify for money back from the government. Given the extensive marketing campaigns from legitimate tax preparation firms making similar claims, it's easy to see how one might fall for these criminals' promises. Yet in the end, you can end up making false claims for tax credits like the Earned Income Credit, various credits for education, or even fictitious Social Security benefits. Meanwhile, in the time it takes for the IRS to process your return and issue a bill for unpaid taxes, your "preparer" is long gone.

Your best solution is to use only reputable professional preparers for your tax return. Moreover, if your preparer says you might be owed a big refund, make sure you take the time to understand the tax laws in question before you start spending that money.

5. Criminals Targeting Your Tax Preparer

You're not the only potential weak link in the chain of custody for your tax return. Some scammers instead look at the professionals who prepare tax returns, looking to hit the jackpot by getting access to information from hundreds of clients at a single time.

One recent scam involves an email that purports to request updated information for use with the IRS' e-services portal. By collecting usernames, passwords, and electronic filing identification numbers, the criminals hope to penetrate professionals' accounts and gather personal and financial information for use in further identity theft. If you use an outside tax preparer, be sure to pass this warning on so that you avoid taking collateral damage.

You can usually avoid tax scams just by being aware of them. Still, as criminals get more sophisticated, you'll need to be increasingly careful to make sure you don't become the next victim of identity theft.

Motley Fool contributor Dan Caplinger has been the victim of identity theft and knows many others who've suffered the same fate. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.​

]]>con artistsfraudincome taxphishingscamtaxtax preparerDan CaplingerThu, 12 Mar 2015 06:00:00 ESTTax Trap: How Phaseouts Can Take Away Valuable Breakshttp://www.dailyfinance.com/2015/03/06/phaseouts-can-take-away-tax-breaks/http://www.dailyfinance.com/2015/03/06/phaseouts-can-take-away-tax-breaks/http://www.dailyfinance.com/2015/03/06/phaseouts-can-take-away-tax-breaks/#commentsFiled under: Taxes, Tax Changes, Tax Credits, Tax Laws, Tax RefundsShutterstock
Most taxpayers try to take advantage of every tax break they can find, and many make plans to arrange their finances to make maximum use of credits, deductions, and other tax breaks. But the tax laws are riddled with traps that often take away tax breaks. One of the most common involves what are known as tax phaseouts: income levels at which tax credits and deductions begin to disappear.

Phaseouts On the Rich

Many of the tax phaseouts that get the most attention are tailored toward taking away tax benefits for high-income taxpayers. For instance, the tax law changes that took effect at the beginning of 2013 reinstated what's known as the Personal Exemption Phaseout, which starts taking away the income reduction for personal exemptions for single taxpayers making more than $250,000 and married taxpayers with income over $300,000. The reduction is 2 percent for every $2,500 above the respective threshold, meaning that those who make $125,000 more than the threshold amount no longer get any benefit from personal exemptions. With personal exemption amounts of $3,950 per person in 2014, big families can lose thousands of dollars in tax breaks because of these phaseout provisions.

Indeed, many phaseouts target taxpayers with relatively high incomes. The Adoption Credit, for instance, begins to phase out at $197,880 of income, and $40,000 above that threshold, it disappears entirely. Similarly, the amount that you're able to exclude from the Alternative Minimum Tax begins to phase out once your income rises above $117,300 for single filers and $156,500 for joint filers, losing $1 for every $4 above the limit until you run out of exemption.

How Phaseouts Can Hurt Lower-Income Taxpayers

But phaseouts don't just target those best able to handle their disappearance. Some of the most draconian phaseout provisions are on tax breaks targeted at low-income taxpayers.

The best example is the Earned Income Tax Credit. This credit gradually rises with income, and once it hits its maximum amount, it stays there for those with children until income reaches $17,830 for single filers or $23,260 for joint filers. Above that level, though, the credit starts to go away. For those with one child, the phaseout rate is about $16 for every $100 of additional income above that threshold. If you have two or more children, the rate jumps to more than $21 for every extra $100 you earn.

Phaseouts therefore have a huge impact on the marginal tax rate that recipients of the Earned Income Tax Credit pay. In addition to the regular 10 percent or 15 percent tax rates that generally apply to those who have incomes in the range eligible for the credit, the phaseout adds 16 to 21 percentage points to their effective marginal tax rate. When you do the math, marginal rates of as much as 36 percent treat low- and middle-income taxpayers the same way the IRS does much higher-income taxpayers beyond those phaseout limits.

Other tax breaks have similar problems. The Child and Dependent Care Credit doesn't entirely disappear, but the amount of the credit gradually drops from 35 percent of the first $3,000 of childcare expenses for those with incomes of $15,000 or less, down to 20 percent for those with incomes of more than $43,000. The Saver's Credit for retirement contributions gives people up to 50 percent back for as much as $2,000 in deposits to IRAs, 401(k)s, or other retirement accounts for single filers earning $18,000 or less or joint filers with income of $36,000 or lower. But that credit drops to 20 percent the moment you earn a single dollar above those limits, with a 10 percent rate applying further up the scale. Once you earn more than $30,000 for singles or $60,000 for joint filers, you lose that 10 percent amount entirely -- again, even if you only exceed it by a single dollar.

How to Deal With Phaseouts

To avoid the traps that phaseout provisions lay out, you have to know in advance what's at stake. Paradoxically, in a few cases, it might make sense to earn less income than you otherwise would in order to avoid the phaseout provision, especially with the Saver's Credit and its particularly abrupt phaseout.

With most phaseouts, earning more income will still leave you with more money in your pocket after taxes. Still, policymakers point to phaseouts as sometimes thwarting the intent of tax breaks designed to help certain taxpayers. Expressing your discontent to those policymakers and the legislators who create tax laws might not help you right away, but it can be one way to get the ball rolling and hopefully effect change in the long run.

Motley Fool contributor Dan Caplinger concentrates on phasing lower taxes in, not out. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.​

]]>adoption creditEarned INcome Tax Creditincomeincome taxpersonal exemptionsPhaseOuttax breaksTax Credittax creditstax lawstaxesDan CaplingerFri, 06 Mar 2015 06:00:00 EST529 Plans Make a Money-Saving Comebackhttp://www.dailyfinance.com/2015/03/05/529plans-make-money-saving-comeback/http://www.dailyfinance.com/2015/03/05/529plans-make-money-saving-comeback/http://www.dailyfinance.com/2015/03/05/529plans-make-money-saving-comeback/#commentsFiled under: Personal Finance, U.S. Government, College, College Savings Plans, 529 Planswavebreakmedia/Shutterstock
As the costs of college education have risen steadily over the years, families have realized that they need to do what they can to help their kids avoid a mountain of student-loan debt once they graduate. One of the most popular ways that Americans have saved for college is through 529 plans, also known as college savings plans. Back in January, though, the future of 529 plans was in peril, as President Obama's budget included a provision that would have endangered the use of college savings plans as a viable way to save more for college education.

Backlash against the budget proposal was extremely strong, leading to its removal from the administration's budget. Now, lawmakers have taken action to make 529 plans an even more useful tool for savers. Below, we'll take a look at why 529 plans were under threat and what the government is not trying to do to strengthen college savings plans for the future.

Taking Away a Key Tax Break

The most important element of the 529 plan is that it allows you to save money in a special account that is free of tax. Not only do you avoid having to pay income taxes on the interest, dividends, and investment appreciation on your holdings within the 529 plan throughout your children's pre-college years, but you also get to make tax-free withdrawals of those earnings as long as you spend the money on qualified educational expenses.

The administration's budget proposal sought to take away the tax-free feature of 529 plan withdrawals used to pay for a college education. Instead, the earnings that 529 plan accounts collected would be subject to income tax when they were withdrawn, in a manner similar to how traditional IRAs for retirement get taxed. Taxpayers would get credit for the after-tax money they had used to contribute to the 529 plan in the first place, but they'd have to pay taxes on any rise in the account's value resulting from investing those contributions.

The changes would only have applied to new 529 plans, but in response to loud criticism from the public, the administration withdrew its proposal on 529 plans. Now, though, lawmakers have started work on measures that would enhance the value of the college savings plans.

Making 529 Plans Even More Useful

Late last month, the House of Representatives passed H.R. 529, a bill aimed at expanding college savings plans. If it passes, the bill would make some major enhancements to 529 plans going forward.

First and foremost, the bill would expand the definition of qualifying educational expenses to include computer equipment and software as well as Internet access for students to use while in college. Currently, you're only allowed to withdraw money tax-free for tuition and other fees required by the college or university, as well as materials like books that are specifically required for the coursework the student does. Room and board also qualifies as long as the student is enrolled at least half-time, but most furnishings and other optional costs don't qualify.

Second, the bill would remove an onerous and largely outdated provision of 529 plan law that requires parents to add up the money they take out of multiple plan accounts and perform certain calculations to determine whether any of the money is subject to tax. Under current law, those provisions rarely apply, but the bill would ensure that even if the tax-free nature of 529 plans comes into question again in the future, savers wouldn't have to deal with the complication of coordinating multiple accounts for tax purposes.

Finally, the bill would allow parents who get refunds from colleges and universities to put that money back into a 529 plan account. Parents would have 60 days to get the refunded money back into the 529, closely mirroring what retirement savers are allowed to do with rolled-over IRA withdrawals.

Be Smart About College Savings

The passage of H.R. 529 is far from assured, despite the House's 401-20 vote in favor of the measure. Despite a veto-proof majority, the Senate still has to consider the bill, with possible amendments that could change its provisions.

Nevertheless, with 529 plans having survived the threat of having their tax-free nature taken away, college savers can still benefit greatly from using college savings plans under current law. Any added provisions making them even more attractive would just be icing on the cake for parents looking to do their best to support their children's education.

Motley Fool contributor Dan Caplinger isn't looking forward to his 10-year-old's future fight with financial aid offices. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.

]]>529 planscollegecollege savingscomputersinternet accessobamarefundsaving for collegesoftwaretaxesDan CaplingerThu, 05 Mar 2015 06:00:00 ESTThe Simple Trick to Make Your Tax Deductions Work Harderhttp://www.dailyfinance.com/2015/03/05/make-tax-deductions-work-harder/http://www.dailyfinance.com/2015/03/05/make-tax-deductions-work-harder/http://www.dailyfinance.com/2015/03/05/make-tax-deductions-work-harder/#commentsFiled under: Taxes, Income Tax, Tax Deductions, Tax Laws, Tax RefundsRyan Mackay/Getty Images
With April 15 less than six weeks away, taxpayers are looking for every possible way to cut their tax bill on their 2014 returns. Yet while there's only so much you can do to make your taxes easier to deal with this year, there are some steps you can take now that will pave the way to lower taxes in future years. One little-known trick that takes advantage of the standard deduction and itemized deductions can help millions of taxpayers save hundreds or even thousands of dollars over the course of multiple years, and to use it well, it's smart to start thinking about it right now.

Standard vs. Itemized Deductions

The IRS gives nearly everyone two ways to take deductions from their gross income before calculating their tax bill. Typically, you have a choice: You can take the appropriate standard deduction for your particular filing status, or you can itemize your deductions. Obviously, it makes sense to use whichever one produces the larger deduction.

Yet for many taxpayers, there's not a huge difference between itemizing deductions or taking the standard deduction. This makes sense, as the general idea of providing a standard deduction isn't to give taxpayers a windfall but rather to approximate a typical amount of deductions that you would otherwise have to itemize in order to claim. That also explains why standard deductions are higher for those who are 65 and older or are blind, as those groups of taxpayers tend to have higher levels of itemizable deductions that would warrant a corresponding increase in the standard deduction amount.

If the deductions you could itemize are within a small amount of your standard deduction, then you might figure that you should go ahead and save yourself the time and trouble of extra calculations and just take the standard deduction. But for many people, there's a better way to get the best of both worlds.

Bundling Your Deductible Expenses

The best solution to the standard vs. itemized deduction dilemma is to alternate back and forth from year to year. How it works is simple. In one year, aim to maximize your itemized deductions. In the next year, reduce your itemized deductions and take what will therefore be a much larger standard deduction. When you look at the sum of the two years, you'll find that your total deductions can sometimes be thousands of dollars higher using this method.

This strategy might seem too good to be true, but all it involves is the timing of when you pay bills that you'd eventually owe anyway. For instance, in order to maximize your itemized deductions, look at doing the following:

Prepay your state and local property taxes before Dec. 31, even if they're not due until later in the following year.

Make estimated tax payments on state and local income taxes before the end of the year that you can use to reduce your tax liability the following year.

Try to group predictable medical expenses into the same year.

Bundle two years' worth of charitable giving into a single year. For instance, you can make one year's gifts in January and then give again in December, and then go the entire following year without making annual gifts at all, instead waiting until January two years from now and repeating the pattern.

You can use the same general strategy with nearly any deductible expense, as it's the timing of when you make the deductible payment that determines which tax year it goes into.

For example, say that your standard deduction for 2015 will be $6,300 and you typically have $6,000 worth of itemized deductions. Ordinarily, you'd just take the standard deduction and end up $300 ahead. But if you can take $5,000 of those $6,000 in itemized deductions and bundle them into a single year, then you'll be able to take an $11,000 deduction by itemizing, while then only paying $1,000 the following year and still getting to claim the $6,300 standard deduction. That boosts your total deductions for the two years from $12,600 to $17,300 -- a 37 percent increase that could put anywhere from $470 to more than $1,860 in tax savings back in your pocket.

Itemizing your deductions can seem like a pain in the neck. But by taking some simple steps to make the most of your ability to itemize, you could end up with huge tax savings you'd never before dreamed possible. That's an April gift everyone deserves.

]]>Dan CaplingerThu, 05 Mar 2015 06:00:00 ESTTax-Free Trick Many Ordinary Americans Don't Know Abouthttp://www.dailyfinance.com/2015/03/04/tax-trick-ordinary-americans/http://www.dailyfinance.com/2015/03/04/tax-trick-ordinary-americans/http://www.dailyfinance.com/2015/03/04/tax-trick-ordinary-americans/#commentsFiled under: Taxes, Income Tax, Tax Cuts, Tax Laws, Tax RefundsDiane Macdonald
Many people believe that only rich people get the benefits of lucrative tax breaks. Yet for years now, the tax laws have made provisions for ordinary middle-class Americans to get just about the best possible tax break out there: tax-free treatment for a portion of their income. Even better, with this break, you don't have to lock up your money until retirement. In order to take advantage of this break, though, you have to know the specific types of income that are eligible -- and then put yourself in a position to start earning that kind of income for yourself.

Going Beyond Retirement Accounts

When most financial experts talk about tax-free growth, they'll typically mention Roth Individual Retirement Accounts and Roth 401(k) plan accounts. Roths give retirement savers a chance to earn tax-free income and growth on their investments, with the opportunity to avoid tax on all the gains they earn between when they make their Roth contributions and when they take the money out in retirement. Roths can make great investment vehicles for people saving for retirement, especially if you're in a low tax bracket right now.

But there's another tax-free opportunity that you don't need a retirement account to use. The tax law currently makes provisions for special treatment for two types of investment income: long-term capital gains and qualified dividends on stocks and mutual-fund distributions.

The part of these tax provisions that people know best applies to higher-income taxpayers. Until 2013, a maximum rate of 15 percent applied to long-term capital gains and qualified dividends. Two years ago, changing tax laws imposed a 20-percent rate on those taxpayers who were in the highest available tax bracket.

What many people never realize, though, is that a special 0 percent rate applies to taxpayers who are in the two lowest income-tax brackets. That might sound like it's reserved for low-income taxpayers, but in actuality, the second-lowest bracket extends upward all the way to taxable income of $73,800 for joint filers and $36,900 for single filers. Moreover, that doesn't include the standard or itemized deductions and personal exemptions that many people qualify to take, allowing you to make even more money while still remaining in those brackets.

How to Earn Tax-Free Income

If you're in one of those two lowest tax brackets, then tax-free treatment is yours for the taking. But that still leaves the question of what you need to do to earn the right type of income to qualify.

Long-term capital gains are relatively simple. If you have profits from an investment, you have to have held on to that investment for at least a year plus a day in order to get long-term treatment for the gains when you sell. Otherwise, higher short-term capital gains rates apply for investments held for a year or less.

For qualified dividends, the requirements are a little trickier. Typically, stock of U.S. corporations and of some foreign corporations whose shares are listed on a U.S. stock exchange will meet the test for qualified dividend treatment. But special entities like real-estate investment trusts, business development companies and master limited partnerships don't always qualify for the lower rate. In addition, to get qualified dividend treatment, you have to hold on to the stock for more than 60 days out of the four-month period surrounding the date on which the stock goes ex-dividend. Otherwise, you'll pay the ordinary income tax rate for regular income.

If you hold stocks through a mutual fund, then part of the distributions you receive from the fund will represent qualified dividends. Under some circumstances, a fund might pay out some qualified and some nonqualified dividend income, but in that event, it will report that fact on the 1099 tax document you receive early in the year.

From a big-picture standpoint, the tax-free provisions of the tax laws act as an incentive for those with modest income levels to invest for the long run, especially in the stock market. Given the lengths to which most people would go to avoid having to pay tax on their income, making the most of long-term capital gains and qualified dividends makes a lot of sense -- and not only will it save you on your taxes, but it might just encourage you to invest more profitably as well.

]]>capital gains taxincome taxlong-term capital gainslong-term investmentmutual fund distributionsMutual fundsqualified dividendsstockstax breakstax lawstaxesDan CaplingerWed, 04 Mar 2015 06:00:00 ESTHow Mutual Funds Could Get a Lot Less Taxinghttp://www.dailyfinance.com/2015/02/23/mutual-funds-tax-reform/http://www.dailyfinance.com/2015/02/23/mutual-funds-tax-reform/http://www.dailyfinance.com/2015/02/23/mutual-funds-tax-reform/#commentsFiled under: Taxes, Mutual Funds, Income Tax, Tax LawsShutterstock
One hot-button tax issue that surprises many taxpayers every year is just how much tax their mutual funds can generate -- regardless of whether those funds have actually made their shareholders any money lately.

Recently, mutual-fund research giant Morningstar called on lawmakers to fix what many have long seen as an unfair tax law that hurts many fund investors. Although attempts by Congress over the past 15 years have thus far yielded no success, Morningstar hopes that the results of the 2014 elections will make compromise on this key issue for ordinary American investors more likely.

How Mutual Funds Hurt You at Tax Time

In general, mutual funds have a number of attractive characteristics. They allow investors with even small amounts of money to invest in a wide array of different stocks, bonds or other securities, with the ability to get a diversified portfolio easily and efficiently. Moreover, unlike regular companies, mutual funds don't have to pay any taxes at the corporate level, which means that they can pass through all of the income that they generate to their shareholders.

The price that mutual fund shareholders pay for these benefits, though, can be harsh. Mutual funds have to distribute nearly all of their income each year, including any capital gains that they've generated from the sale of investment securities in their portfolios. When you receive a mutual fund distribution, you usually have to include the distribution in your taxable income, unless you use a tax-favored retirement account like an IRA to invest in the fund.

Two aspects of mutual fund taxes are particularly unfair. First, you have to pay taxes on these fund distributions even if you never see the money. Many fund investors choose to reinvest any distributions back into additional fund shares, leaving them in exactly the same financial position before and after a fund makes its mandatory payout. Yet the Internal Revenue Service doesn't distinguish between receiving your distribution in cash or reinvesting it into the fund; you have to pay taxes either way.

What's even more unfair is that you might end up having to pay tax even if you never received the benefit from the income or capital gains in question. For instance, say you invest $100 to buy four shares of a mutual fund at $25 per share, the day before it makes a large capital-gains distribution of $5 per share. If you elect to have your distribution reinvested, you'll end up having a total of five shares, because your four shares will pay you a total of $20, exactly matching the after-distribution price of the fund shares: the original $25 less the $5-per-share distribution.

After you reinvest the distribution, those five shares at $20 each will still be worth a total of $100. Yet you'll have to pay tax on the $20 -- even though the gains came about from investments made long before you bought into the fund.

The History of Mutual Fund Tax Reform

Unfortunately, lawmakers have a bad track record in dealing with mutual fund tax issues. Back in 2001, when the bursting of the tech bubble led to huge losses combined with extensive capital-gains distributions from mutual funds, 90 mutual fund industry leaders looked for support in Congress to allow mutual fund shareholders to defer taxes on capital gains distributions. Yet the bill never moved forward.

On several occasions between then and now, the issue has arisen. Most notably, during 2008, the stock market again plunged at the same time that funds had to make sizable distributions. Yet the budget cost of offering that tax break is substantial enough that it's difficult for lawmakers to make the economics of the proposal work.

As a result, mutual fund investors shouldn't expect Congress to have their back at tax time. Alternatives that you have include using more tax-efficient exchange-traded funds, or investing with IRAs, 401(k)s, or other retirement accounts that offer tax deferral on mutual fund distributions. Unless lawmakers finally break through the gridlock to get mutual fund tax reform passed, your best bet is to take other measures to protect yourself from unfair taxes.

Motley Fool contributor Dan Caplinger has endured mutual-fund taxation for a long, long time. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.​

]]>capital gainscapital gains taxcongressincome taxInvestingMorningstarMutual fundsreformtaxtaxesDan CaplingerMon, 23 Feb 2015 06:00:00 ESTWhy the Next Social Security Crisis Could Be Just a Year Awayhttp://www.dailyfinance.com/2015/02/17/social-security-crisis-nears/http://www.dailyfinance.com/2015/02/17/social-security-crisis-nears/http://www.dailyfinance.com/2015/02/17/social-security-crisis-nears/#commentsFiled under: Retirement, U.S. Government, Government Spending, Social SecurityShutterstock
Most Americans know that the Social Security system faces some long-term financial troubles, as a rising population of retirees relies on ever-fewer workers paying the taxes that finance their benefits. Yet most people focus on the retirement portion of Social Security, which has enough money remaining in its trust fund to cover shortfalls between tax revenue received and monthly benefits paid until 2033.

But there's an aspect of Social Security that many people rarely think about, and it faces much more immediate problems. Social Security also makes payments to disabled workers and their families, who together make up about 11 million recipients. The bad news is that the trust fund that finances disability benefits could run out of money by the end of 2016, according to the most recent Social Security Trustees' Report -- giving lawmakers a lot less time to come up with a solution to the problem.

What's In Store for Social Security Disability

Recently, the Senior Citizens League looked at the problem of Social Security disability and what the current financial difficulties would mean for recipients. Because the portion of payroll taxes that goes toward funding disability payments only covers about four-fifths of what Social Security disability pays out, the program has had to use the trust fund set aside for covering disability shortfalls. Analysts estimate that when that trust fund runs out of money late next year, disability recipients will face a 19 percent cut in their monthly benefits.

The impact on disabled Americans could be catastrophic. Currently, the average disability benefit of $1,146 per month is enough to keep disabled Americans above the poverty line, according to a research report from the Heritage Foundation. But with a 19 percent reduction, the average benefit would fall more than $200, taking it below the poverty line.

Raising the stakes is the fact that Congress has taken steps to avoid what would otherwise be an easy way to put off dealing with the problem. With the trust fund that provides money for retirement benefits still having plenty of money, the simple fix is to authorize a transfer of available funds from the retirement fund to the disability fund. Because the disability fund's spending needs are smaller than the retirement fund's, allowing such a transfer would give disability recipients full benefits for 15 to 20 years while costing the retirement fund only a few years' worth of solvency.

In an effort to require lawmakers to consider a longer-term solution to the bigger problem of Social Security generally, though, the House of Representatives passed a procedural rule that requires trust-fund transfers to be part of a larger Social Security reform plan that makes changes either to the taxes Social Security collects or the benefits it pays. Groups like the Senior Citizens League are skeptical that lawmakers will be able to come up with a broad-ranging reform package, especially given the fact that they have known about the coming crisis for years but haven't taken much action to date.

Are Social Security's Problems Solvable?

The debate over Social Security stems from disagreements about the true purpose of the program. Some believe that Social Security should remain a safety net only for a limited number of Americans, noting the fact that when the government first created the program, fewer people had a long enough life expectancy to collect benefits, and those who did generally collected them for a shorter period of time.

Meanwhile, others note that Social Security has had to assume a role that corporate pensions used to fill, as employers have generally moved to 401(k) plans and other defined-contribution retirement plans that put the onus on workers to figure out how to invest their money well enough to provide needed income in retirement. Those who favor expansion of Social Security point to dramatic moves like lifting the current wage cap on Social Security taxes, which would dramatically boost the amount of tax that high-income earners pay into the system. On the other side of the coin, measures like means-testing Social Security could take benefits away from those who don't absolutely need them. Yet as you'd expect, all of these proposals are controversial.

For now, though, lawmakers have less than two years to figure out how they want to handle the immediate problem of Social Security's disability crisis. Without action, Americans will get to see firsthand what happens when a trust fund runs out of money, potentially giving everyone a look at what could happen within the next 20 years to retirement benefits for tens of millions of Americans.

Motley Fool contributor Dan Caplinger hopes he gets Social Security but is making contingency plans just in case. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.​

Americans love their pets, and they aren't afraid to open up their wallets to take care of them. Americans spent close to $60 billion on pet expenses during 2014, according to estimates from the American Pet Products Association. Between food, veterinary care and other supplies, it's easy for costs to add up.

As the dog days of tax season approach, one question that many people have is whether there's any way they can get any sort of tax break for their pet expenses. As outlandish as it might sound, there actually are some perfectly legal tax deductions you can claim from what you spend on your pets. Before turning to those deductions, let's first take a look at what you can't do with pet expenses.

Pet Dependent? Forget About It

The most obvious tax break that might tempt you is the personal exemption for dependents, which on your 2014 return will give you a reduction of $3,950 on your taxable income. Certainly, your dogs, cats or other pets rely on you for their survival. But the Internal Revenue Service takes the view that only human dependents can qualify for the valuable personal exemption.

Several other similarly enticing deductions also don't work. Veterinary care might cost you as much as a doctor's visit for yourself, but you're not allowed to deduct those vet charges as medical expenses on your tax return. Similarly, if you're traveling on business, you can't write off the costs of boarding your dog in a kennel as a travel expense.

When You Might Have a Legitimate Write-Off

Even if pets aren't the perfect tax breaks in all situations, there are limited circumstances in which you might be able to deduct some of their expenses. Here are a few:

1. If You Need a Guide Animal

Pet medical care isn't deductible, but if you need a guide animal for your own health, the expenses of keeping that animal become eligible medical expenses. Those costs include food, veterinary care, grooming and other expenses that the guide animal needs to give you assistance. In addition, therapy animals can also qualify, as long as you've received a medical diagnosis for a condition for which you need the animal. Keep in mind, though, that you'll need to overcome the special threshold for deducting medical expenses -- 10 percent of adjusted gross income for those under age 65 -- before you can deduct guide-animal costs.

2. If You Use a Guard Animal

The IRS has allowed taxpayers to deduct expenses for guard animals protecting business property. Watchdogs are prime candidates for this deduction, as long as the dog is of an appropriate breed and you can document your expenses and the amount of time the dog spends on guard duty.

3. If You Move

If you move, you can deduct special expenses of moving your pets as long as the overall move qualifies for moving-expense deductions generally. Typically, the move has to be for work purposes, and your new job has to be at least 50 miles further away from your previous home than your old job was. If you qualify, the deduction is available even if you don't itemize, although a special form is necessary to claim the deduction.

4. If You're in a Pet Rescue Program With an Animal Shelter

Many animal shelters are nonprofit organizations, so if you agree to provide a pet a foster home, you might be able to write off some of your expenses as charitable donations. In addition to pet food, vet bills, and supplies, you can also get a modest write-off for vehicle mileage. However, be sure to keep good records and get an acknowledgement of your work from the shelter in question, or else the IRS might challenge your claim.

5. If Your Pet Turns Into a Profession

Some pet owners are able to turn their love of animals into a moneymaking profession. Whether it's racing horses, showing dogs or breeding animals of all sorts, you might be able to count some or all of your pet expenses against the income they generate.

A lot rides on whether you're considered to have a business or merely a hobby. Hobby losses are deductible only to the extent you have gains, and you have to treat hobby losses as a miscellaneous deduction, which can limit the amount you can actually claim. The hurdle for establishing a legitimate business is higher, but you may be able to deduct all of your expenses for a business, even if it results in a net loss.

Every situation is different, and you should work with a tax professional before claiming any of these expenses in your own specific case. Nevertheless, if any of these situations applies to you, you might be able to turn your pet into a nice tax break come April.

Motley Fool contributor Dan Caplinger has two cats who would love to be tax breaks if it meant more treats. You can follow him on Twitter @DanCaplinger or on Google Plus. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.​

Many taxpayers pride themselves on being creative with their ideas on paying less to the Internal Revenue Service, and one enterprising tax break is available to those who can claim someone who shares their home as a dependent on their tax return. For every dependent you're eligible to take, you can write off $3,950 of taxable income, which many people can use to reduce their tax bill by anywhere from about $400 to more than $1,500. So whether you live with your boyfriend or girlfriend or just have a roommate you help out financially, let's take a look at whether you can turn the person you live with into extra money in your pocket.

How the IRS Defines Dependents

Regardless of your opinions about whether the person you live with is dependent on you, the IRS has very strict guidelines that determine whether you're entitled to take the dependent exemption. Specifically, they have to meet the definition of either a qualifying child or a qualifying relative. Although that sounds like it rules out anyone who's not related to you, it actually is more inclusive than it sounds.

Most roommate situations won't involve a qualifying child. In order to qualify, the person needs to be your child, stepchild, foster child, sibling, stepsibling or a descendant of them, like a grandchild or niece or nephew. The person must also be younger than 19 or a student and younger than 24, live with you for more than half the year and provide less than half of his or her own financial support during the year.

The more common test for roommates and unmarried people in relationships is the qualifying relative test. To qualify, the person you live with can't be the qualifying child of anyone else. The person has to live with you as a member of your household for the entire year, unless the person is a relative by blood or marriage. You have to provide more than half of the person's total financial support for the year, and the person can't have gross income of $3,950 or more.

In addition to these conditions, you also have to meet some other tests. You're generally not allowed to claim someone as a dependent who isn't a U.S. citizen, resident alien, national or a resident of Canada or Mexico. In addition, if the person is married, you can't claim a dependent exemption unless they file a separate return or file jointly only to claim a refund of taxes withheld from their paycheck or in estimated tax payments.

Do You Qualify?

Obviously, there are many ways you can fail these tests. If a boyfriend is still a dependent on his parents' return, then you won't be able to claim him as your own dependent. If a girlfriend has her own place and doesn't live with you all the time, she won't meet the requirements, either. And with such a low income requirement, many prospective dependents will end up earning too much to qualify even if they only have a part-time job -- or they might cover just enough of their expenses to keep you from meeting the more-than-50-percent-support test.

Still, if you qualify, then it's perfectly legal to claim someone you live with as a dependent. In order to satisfy the IRS if you get audited, though, you'll want to make sure you hold on to all available documentation to support your claim. Otherwise, you could find yourself with an even bigger problem on your hands. Nevertheless, you shouldn't hesitate to claim a dependent exemption if you're allowed to. After all, if you've provided financial support for someone all year long, it's the least they can do to repay you.

]]>boyfriendclaimdependentdependentsfederal income taxgirlfriendincome taxirsliving togethertaxtaxesDan CaplingerThu, 05 Feb 2015 06:00:00 EST1040, 1040A, 1040EZ: Which Tax Form Should You File?http://www.dailyfinance.com/2015/01/29/1040-1040a-1040ez-which-form/http://www.dailyfinance.com/2015/01/29/1040-1040a-1040ez-which-form/http://www.dailyfinance.com/2015/01/29/1040-1040a-1040ez-which-form/#commentsFiled under: Taxes, Income Tax, Tax Credits, Tax Laws, PlanningGetty Images
Choosing which 1040 tax form you need to file your return on can be a lot harder to figure out than you'd think, but answering just a few basic questions will lead you to the right version.

The Most Important Rule: Keep It Simple

First of all, if you use tax software to prepare your return, then it will generally take the decision of which tax form to file out of your hands. Instead, the software will evaluate the answers you provide to its list of questions and then select the most appropriate form for your needs.

For those who prepare their own returns, though, the basic Internal Revenue Service rule is that the best form to file is the simplest one that addresses all of your needs. The 1040EZ is the easiest form to fill out, with the 1040A being more complicated but still less difficult than the full 1040 form.

Can You File Form 1040EZ?

Form 1040EZ is designed for the simplest returns. In order to use it, you have to meet several requirements.

First of all, Form 1040EZ is only available for filing status of single or married filing jointly, and those who have dependents to claim can't use the form. Taxpayers have to be under age 65 and ineligible for higher standard deductions for the blind.

In addition, there are income-related restrictions. You can't have more than $100,000 in taxable income, and in general, it can only come from wages, salaries, tips, unemployment compensation and taxable scholarship and fellowship grants. Some taxable interest is allowed, but only if it's less than $1,500 for the year. Alaska residents are also allowed to use 1040EZ even if they receive Permanent Fund dividends from the state.

Finally, the only credit you can claim on the 1040EZ is the Earned Income Credit, and you can't itemize deductions or make any other adjustments to income. Those who received advance payments of premium tax credits under the Affordable Care Act aren't eligible to file Form 1040EZ. Those who hire household employees like babysitters or nannies for whom they have to pay employment taxes also can't file 1040EZ, as well as those who are debtors in bankruptcy filings after Oct. 16, 2005.

What 1040A Covers

Form 1040A has some of the same restrictions as 1040EZ. Income has to be less than $100,000, and you still can't itemize deductions. But it's more flexible in other areas. For instance, heads of household, qualifying widows and widowers, and married people filing separately can use Form 1040A.

Form 1040A allows you to include more types of income. In addition to those allowed on 1040EZ, you can have ordinary dividends, capital gains distributions from mutual funds, pension and annuity income, IRA distributions, and taxable Social Security benefits and still file a 1040A. You can also claim deductions for IRA contributions, student loan interest, tuition and fee payments, and expenses that educators pay for supplies for their own classrooms.

You can also claim more credits on a 1040A. Those seeking credits for child and dependent care expenses, education expenses, and retirement savings contributions can use the form, as can those claiming credits for the elderly or disabled. Both the child tax credit and the additional child tax credit are available to 1040A filers.

Lastly, you can handle a limited number of special situations on 1040A. Those receiving dependent care benefits from work can use the form, as can those who have to pay taxes due to having past educational credits recaptured. Even some people who owe alternative minimum taxes can use Form 1040A.

The Last Resort: Form 1040

If you don't qualify for 1040EZ or 1040A treatment, then your only choice is the long Form 1040. Most notably, that includes taxpayers who want to itemize deductions.

For those who want it, the IRS has developed a tool to help you figure out which form is the simplest available for your needs. You can access it at this IRS website, and it will take information from the tax forms you've received from your employer, financial institutions, and other sources to make a recommendation.

Filing your taxes can seem complicated. But by starting with the right form, you'll be able to keep things as simple as possible and avoid biting off more than you need to chew at tax time.

Motley Fool contributorDan Caplingerhasn't been able to file a simple tax return in a long time, but he's not complaining. You can follow him on Twitter@DanCaplingeror onGoogle Plus. To read about our favorite high-yielding dividend stocks for any investor, check outour free report.

]]>10401040A1040EZfederal income taxincome taxtax formstaxesDan CaplingerThu, 29 Jan 2015 06:00:00 ESTThe 5 Most Popular Tax Credits: Can You Use Them, Too?http://www.dailyfinance.com/2015/01/27/most-popular-tax-credits/http://www.dailyfinance.com/2015/01/27/most-popular-tax-credits/http://www.dailyfinance.com/2015/01/27/most-popular-tax-credits/#commentsFiled under: Taxes, Personal Finance, Income Tax, Tax Credits, Tax LawsGetty Images
Tax credits are especially valuable, because unlike deductions, credits reduce your total tax bill dollar for dollar. Whenever you can qualify to take a tax credit, it's always worth taking a close look to maximize its value and ensure that you remain eligible.

To help you home in on the credits that are most likely to help you, we looked at the latest data from the IRS -- from the 2012 tax year -- to see which credits people are most likely to take.

5. Retirement Savings Contributions Credit

More than 6.9 million taxpayers took the retirement savings contributions credit, which matches up to 50 percent of the first $2,000 in contributions that single filers make to an IRA or an employer-sponsored retirement plan at work, or $4,000 for joint filers. The dollar value of those credits was relatively low at just $1.2 billion, but that nevertheless saved an average of about $175 per taxpayer in tax liability.

The credit is only available to single filers making less than $30,000 or joint filers making less than $60,000, and the highest percentages apply only to those who meet even smaller income limits of $18,000 and $36,000, respectively. The purpose of the credit is to encourage everyone to save, and so if you set money aside, this credit is your reward for being financially prudent.

4. Foreign Tax Credit

About 7.1 million taxpayers claimed the foreign tax credit. But even though not many more people claimed it than the retirement savings contributions credit, the foreign tax credit had a much more significant financial impact, saving taxpayers $19.1 billion.

The foreign tax credit is intended to avoid double taxation on income earned from another country. It most often applies to international investments, where many brokers withhold foreign taxes automatically. For those whose only exposure to international investments is through mutual funds, it's sometimes possible to take a full credit against your U.S. taxes for any foreign taxes you pay. Yet complex rules can apply in more complicated situations, so this is an area where a good tax advisor can be extremely helpful.

3. Education Credits

More than 10 million taxpayers took advantage of credits designed to offset college and other educational costs. The vast majority of those taking educational credits used the American Opportunity Tax Credit, which applies to the first four years of college and can reduce your tax bill by up to $2,500. In some cases, you can get a portion of the American Opportunity Tax Credit back as part of your refund even if you didn't have enough tax liability to apply against it.

When you also combine the Lifetime Learning Credit, which pays 20 percent of up to $10,000 in annual educational costs for a wider range of schooling including graduate school and training classes, taxpayers collected about $19.3 billion from education credits, of which $8.8 billion was refundable. Those amounts make a huge difference to cash-strapped families sending kids to college.

2. Child Tax Credits

Families benefit from credits for having qualifying children, with 22.9 million taxpayers claiming the regular child tax credit and 20.5 million using the additional child tax credit as well. Combined, those two credits returned $55.4 billion to taxpayers.

The regular child tax credit pays up to $1,000 for qualifying children under age 17, of which there were more than 70 million, with phase-outs starting for singles earning $75,000 or more and joint filers with incomes of $110,000. Because the regular child tax credit is nonrefundable, the additional child tax credit fills in the gap for lower-income taxpayers, offering a refundable credit to those who have sufficient job income that makes up for any lost regular child tax credit amounts.

1. Earned Income Tax Credit

The most often-taken credit is the Earned Income Tax Credit, which appeared on 27.8 million returns. It's also a hugely important credit for Americans, paying out more than $1.02 trillion, or almost $3,700 per taxpayer claiming the credit.

The Earned Income Tax Credit is aimed at low- and middle-income taxpayers, with the highest amounts paid to those who have eligible children. It's also one of the few credits that is fully refundable, meaning that you can get a refund for up to the full amount of the credit even if you don't have any tax liability against which to apply it.

Credits are extremely valuable for taxpayers, and you should do everything you can to find credits you qualify for. If you do, they'll do a great job of reducing your tax liability as much as possible. We have also compiled a list of the most popular tax deductions.

]]>American Opportunity Tax Creditchild tax creditEarned INcome Tax Creditforeign tax creditincome taxlifetime learning creditretirement savingsTax CredittaxesDan CaplingerTue, 27 Jan 2015 06:00:00 ESTThe 5 Most Popular Tax Deductions: Do You Qualify for Them?http://www.dailyfinance.com/2015/01/24/most-popular-tax-deductions/http://www.dailyfinance.com/2015/01/24/most-popular-tax-deductions/http://www.dailyfinance.com/2015/01/24/most-popular-tax-deductions/#commentsFiled under: Taxes, Income Tax, Tax Deductions, Sales TaxKaren Roach/Shutterstock
Just less than one in three taxpayers claim itemized deductions on their tax returns, with the vast majority choosing instead simply to take the standard deduction, according to the latest available IRS figures, from the 2012 tax year. Yet that still means that more than 46 million returns include itemized-deduction statements, and the figures reveal the several key deductions that more Americans rely on than any other tax breaks available. Let's take a look at the five most popular tax deductions and whether you can qualify for them.

5. Tax Preparation Fees

More than 21.7 million taxpayers claimed itemized deductions for tax preparation fees. The total deductions claimed totaled up to $7.2 billion, or an average of about $330 per taxpayer.

That number might seem low, especially given how many people need to get tax help. Yet the thing to remember is that your ability to deduct tax preparation fees and other miscellaneous deductions is limited. Unless those deductions add up to more than 2 percent of your adjusted gross income, you can't deduct a penny -- and even if the amount is greater, you can only deduct whatever the excess is over that 2 percent figure. As a result, despite its popularity, many people who pay for tax preparation find themselves unable to take advantage of this deduction.

4. Home Mortgage Interest

One of the most important deductions available to homeowners is the mortgage interest deduction, which allows you to write off the interest portion of your mortgage payments on your tax return. More than 34.3 million taxpayers reported mortgage interest on which their lenders had provided information, and another 1.2 million deducted interest despite having no documentation from their lenders. The total amount claimed was the highest of any deduction, with taxpayers writing off more than $326 billion.

Interestingly, that figure comes even as mortgage rates remain near record lows. In past years, when mortgage rates were higher, the mortgage interest deduction was an even more important part of reducing your tax liability. Some have called for a limit to the mortgage interest deduction, but given the policy interest in encouraging homeownership, it would take draconian measures to get rid of this highly popular deduction.

3. Gifts to Charity

Americans are well known for their charitable giving, and more than 37.3 million taxpayers deducted a total of nearly $200 billion. More than 90 percent of the taxpayers who claimed charitable deductions listed cash gifts, while 60 percent made gifts other than by cash or check, which includes donations of things like clothes or vehicles. Gifts of cash and checks made up about three-quarters of the total value of the charitable donations, but that still leaves a substantial amount for non-cash gifts. Many nonprofit organizations rely on the tax breaks from charitable giving to spur donations, and that makes it a popular tax break not just for taxpayers but also for charities as well.

2. Property Taxes on Real Estate

Moving back to homeowners, not every property has a mortgage, but just about every piece of real estate carries taxes. That led 39.2 million taxpayers to deduct their real-estate taxes, with total deductions amounting to $173.3 billion.

Taxpayers are allowed to deduct real estate taxes on any property owned, including not only your primary residence but also vacation homes and even open land in your possession. Note that your deduction is based on the amount you actually pay in any given year, so in some cases, paying taxes earlier than they're due can actually boost your deductions in one year at the expense of reducing them in other years. That strategy can help you take advantage of the standard deduction and boost your overall write-offs half the time.

1. State and Local Income and Sales Taxes

The most-often-taken deduction is for state and local income and sales taxes. About 43.9 million taxpayers, or 95 percent of all those who file for itemized deductions, took this deduction, amounting to a total of nearly $300 billion.

Historically, taxpayers used to be able to deduct only state and local income taxes. But in part due to the efforts of lawmakers in states that impose no income tax, the rules changed to allow taxpayers to choose to deduct sales taxes instead of income tax. Still, even though a quarter of all returns claim sales tax deductions, the amounts involved heavily favor the income-tax side, with total deducted amounts of $283 billion for state and local income taxes versus just $16.5 billion for sales taxes.

That's the conundrum that many college savers find themselves in after the latest State of the Union address. Among the numerous tax proposals that President Obama included in his speech, one stands out as potentially having a big impact on the tax planning of parents trying to save toward their children's college education. With the administration threatening to take away the tax break on two popular types of college savings accounts, one question many Americans are asking is whether the government can actually change the tax rules even after millions of families have relied on those rules in their financial planning.

The Controversy Over College Savings Plans

The State of the Union address included provisions to expand tax credits for education, increasing their maximum amount for some families and simplifying the patchwork of different breaks available for college and other educational costs. To help pay for these additional tax breaks, the proposal would take away some of the current tax breaks on 529 college savings plans and Coverdell Education Savings Accounts. Under current law, if you use 529 plan or Coverdell ESA money to pay for education, then any income and capital gains that the money in the account earned between the time you contributed it and when you used it is entirely free of tax.

What wasn't immediately clear from the proposal is whether these changes would apply only to future contributions, or would be retroactively applied even to existing accounts. Interestingly, although many would see failing to grandfather existing 529 accounts and Coverdell ESAs as being unfair, there's legal precedent to support the idea that the government could indeed change the tax rules.

The History of Retroactive Taxes

Indeed, if the administration's proposal took the more aggressive approach, it wouldn't be the first time Americans faced a retroactive tax.

In August 1993, President Clinton signed a law raising tax rates on high-income earners and estates. The new rates applied back to the beginning of 1993, and although disgruntled taxpayers went to federal court seeking to have the retroactive application of the rules invalidated, those arguments proved fruitless.

In 1987, Congress passed laws retroactively repealing an estate-tax provision, a repeal which cost one taxpayer $2.5 million. The Supreme Court ruled that taxpayers have no right to rely on tax legislation being permanent, with the majority arguing that as long as lawmakers act with "a legitimate legislative purpose," retroactive application is constitutional. Even though one Supreme Court justice argued that the government had used "bait and switch taxation," he nevertheless concurred with the unanimous holding of the Court.

A 1976 tax-law change affected homeowners' ability to shelter capital gains from the sale of a home from taxation. One homeowner took advantage of rules that allowed half of all gains to be free of tax, but six months later, President Ford signed a law retroactively limiting the taxable amount. Just as it did more than a decade later, the Supreme Court upheld the law as being constitutional.

Beware of Public Opinion in Your Tax Planning

Even if retroactive legislation is constitutional, the more important question the government always faces is whether it's politically viable. In general, retroactive tax increases seem unfair, and public opinion will often prevent politicians from advocating such measures. With college savings plans, the administration is arguing that the accounts primarily help upper-income taxpayers, seeking to build political consensus to drive support for the measure and sweep any concerns over fairness under the rug of public opinion.

Regardless of what happens with 529 plans and other education savings accounts, the lesson taxpayers need to heed is that tax laws that seem to be written in stone provide no guarantees of surviving future changes. With lawmakers having the right to rewrite tax laws at will, you must always remain mindful of possible revisions that can gut your financial planning.

Motley Fool contributor Dan Caplinger wishes he could do a lot of things retroactively. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.​

]]>529 planscollege savingsCoverdell Education Savings Accountgrandfatheredobamaretroactivesaving for collegeState of the Uniontax breakstax codetax lawsDan CaplingerThu, 22 Jan 2015 09:00:00 EST3 Ways to Beat IRS Budget Cuts and Make Tax Prep Easierhttp://www.dailyfinance.com/2015/01/20/beat-irs-budget-cuts-get-help/http://www.dailyfinance.com/2015/01/20/beat-irs-budget-cuts-get-help/http://www.dailyfinance.com/2015/01/20/beat-irs-budget-cuts-get-help/#commentsFiled under: Taxes, Personal Finance, Income Tax, IRS, Tax LawsShutterstock
The Internal Revenue Service is warning taxpayers that 2015 could be a tough year to get the tax help you need. IRS Commissioner John Koskinen recently pointed to budget cuts for the federal tax agency that could result in operational shutdowns and furloughs, poor telephone customer service, and delays in return processing and refund payments. National Taxpayer Advocate Nina Olson characterized the cutbacks as telling "millions of taxpayers who seek help each year, in essence, 'We're sorry. You're on your own.'"

Yet just because the IRS won't necessarily be the perfect resource to get the tax help you need doesn't mean that you have to go without assistance entirely. For many taxpayers, other sources of help in tax preparation can give you a much better experience. Let's take a look at three ways to bypass the IRS to get high-quality help.

1. Get Free Help from Volunteer Income Tax Assistance

The Volunteer Income Tax Assistance program offers help in preparing and electronically filing tax returns. If you have a disability, are elderly, have limited understanding of the English language or make $53,000 or less in income, then you can typically qualify to participate in VITA. Volunteers are IRS-certified to be able to provide basic help and tax-return preparation, and at many locations, you can get help with more difficult issues. Find a local location via this IRS website or by calling 800-906-9887.

To participate, bring photo ID along with your Social Security number, date of birth, copies of your previous year's tax returns,and any W-2s showing your work income and 1099s or other forms showing interest and dividends or other types of income. To take advantage of direct deposit options, you'll also want to have your bank account and routing numbers handy.

2. 60 or Older? Get Free Help Tailored to Your Needs

The Tax Counseling for the Elderly program is designed to provide free tax help with an emphasis toward serving people who are 60 or older. TCE volunteers tend to be retired themselves and are IRS-certified to offer help on questions about pensions, retirement-account distributions and other retirement-related issues that those over 60 most commonly face.

The majority of TCE sites are administered by the AARP Foundation's Tax-Aide program, which has operated for more than 45 years and helped nearly 50 million taxpayers nationwide. To find an AARP-administered site, go to this AARP website or call 888-227-7669. You can also use the same IRS links and phone number listed above for the VITA program to find a list of TCE sites as well.

3. Use IRS Free File

The Free File program is a partnership between the IRS and various private companies that make software for tax preparation. Free File offers two different services depending on your income. If you made $60,000 or less in adjusted gross income in 2014, then you qualify for complete tax-preparation services for free. With your choice of several preparation programs, you'll get guidance throughout the preparation and filing process, with electronic filing at no extra charge. For those who make more than $60,000, tax preparation software isn't free, but you can still use the program's fillable forms, which will help you by automatically doing the math for the figures you enter.

The documents you'll need for Free File are similar to those for VITA and TCE, but the benefit is that you can use your own computer without leaving your home. For more information, check out the IRS Free File website.

Motley Fool contributor Dan Caplinger knows how tough it can be to get good tax help. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.